No. of Recommendations: 70
Saul,
I would argue the hyper-growth SaaS stocks we tend to follow have created a new normal in P/S...not saying that is a good thing. Rather, we now look at a 20 P/S and think "cheap!" which is kind of crazy.

I get that these stocks are asset-light, not-hardware, and have recurring revenue...things that allow (arguably) for a higher valuation than say more traditional companies like an ANET.

My issue is I am started to get deja vu regarding stocks like ZS, from late 1999 and very early 2000, before the bubble burst. Back then I was all over the networking stocks like Cisco, Juniper, Redback Networks, etc... Everything just kept going up. There was a Saul-like board called Gorilla Game in which all the posters just seemed to blindly think "this time things are different" and as long as they could label something a gorilla or chimp or whatever other nonsense, they were shielded from anything ever going wrong in regards to valuation.

I think Juniper got up into the $50b or $70b range for market cap. I kept doing the napkin math and wondering how is this a legit valuation. Then the bubble burst, and JNPR and CSCO have yet to retrace those highs of 2000.

You mentioned in a post somewhere regarding your trading history that you followed your gut in 2000, I believe it was something about Yahoo going up an absurd amount in a few days, and you finally sold and got out before the collapse.

While ZS may not yet be at the Yahoo 2000-ish frenzy, I have also been wondering what is the mental cutoff for extreme valuations? Is it just one of those things you know when you see it? At what point can you declare a "win" and maybe move funds into another solid company that hasn't quite skyrocketed as much?

I sold out of ZS recently. It was "overvalued" when I bought again in Jan, and it went up another 70% in about 2 months. It is growing it's business 65% over an entire year. At some point, doesn't a stock price have to reflect more in line with the growth of their business, however you choose to measure it? (revenue, earnings, billings, etc...)

This doesn't mean I think ZS stopped being a great company, nor that I think it won't be a bigger market cap in 2-3 years or 5-10 years. Pretty good bet it will be. But the next stop for ZS stock growth is a 40+ P/S which is usually reserved for speculative biotechs.

But if we are realistic when looking at your port or the concept of modified buy-and-hold, most of your stocks have not been owned by you for over 1 year, let alone 2 years. ZS just went public 12 months ago.

If the idea is to be in the best possible stocks for growth, in that moment in time, why would ZS be worth so much more than AYX, even though they have approx the same revenue run-rate and both have excellent growth rates? With the recent slide in ESTC, there is a similar argument there. If the market is pricing ZS rationally, then it follows it must be overlooking the value in AYX and ESTC, so wouldn't funds be better allocated to the companies executing equally well that have lower valuations in their stock price?

I am not sure I have a real question in these ramblings, nor do I think there is a right or wrong answer. Holding a great company like ZS is not a bad thing long-term. If the 2000 bubble is too extreme a comparison, another poster brought up Splunk as an example of a company that had a very high P/S and then stock went sideways for 3-4 years, yet the company's growth stayed strong and continues today. ZS at a $3b mkt cap seems a much different price appreciation oppty than ZS at almost $9b mkt cap.

I appreciate you responding to the ZS at 100x question...it had been on my mind too.

thanks,
Dreamer
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